There is no one-size-fits-all approach to the scope and level of
scrutiny a mortgage lender brings to a lease review. Leases are
complex commercial arrangements and lenders invariably face
trade-offs between the time and expense of a thorough review and
understanding the bundle of rights and obligations that make up a
key driver of the value of their collateral. A lender's lease
review will look a lot like a purchaser's, except that instead
of stepping into the landlord's shoes immediately, it must
contend with uncertainty about if and when it will ever have to
take over the lease and the added complexities of enforcing
Key issues in the lease review will fall under three
Does the borrower have the set of
rights and the income stream it is telling you it has in the loan
Is there anything in the lease that
affects the priority of the mortgage or would prevent you from
enforcing your security?
If you do enforce your security, are
there any obligations that you don't want to be on the hook
Terms of the Lease
Together with verifying the rent in
the rent roll, the lender will want to understand whether there are
any free rent periods or prepaid rent and whether there are any
significant exclusions from operating expenses or taxes that form
part of the additional rent.
Counsel should see all of the
documents that comprise the lease. Ensuring that the all documents
were actually signed, signed by the correct legal entity and that
the lease relates to the correct premises and area are preliminary
but important items to confirm.
A lease review can reveal gaps in the
expected rental income stream. The term of the lease (particularly
where it expires before the mortgage), renewal options, rights to
early termination, rights to assign or sublet, go-dark provisions
or rights to terminate if an anchor tenant no longer occupies its
premises can all impact the value of the lease as collateral.
Security and Enforcement Issues
After confirming that there is
nothing in the lease preventing the assignment by way of security,
the lender will want to ensure that there are no restrictions on or
consent rights to transfer by the landlord which could affect its
ability to enforce its security.
The lease should include a
subordination provision and an attornment provision, each of which
may be conditional on a non-disturbance agreement with the
Reviewing the landlord's
termination rights will help to assess the flexibility of the
lender would have upon enforcement. Conversely, the ability to cure
the landlord's default may help to preserve a lease on
Significant Landlord Obligations
Where a building is still being
constructed, or as an inducement to the tenant, the borrower may
have obligations under the lease to pay for construction or
improvements or may have extended a free-rent period. The lender
must ensure that it understands the cost of these obligations, the
tenant's remedies for late delivery and whether the tenant must
participate in the construction or improvement which offset the
A lender will only be able to enforce
over the property specified in its security. Where a lease provides
for relocation rights, or parking rights in neighboring lands, the
lender will not be able to meet these obligations if it has not
enforced against these rights or property.
Options to purchase and rights of
first refusal for additional space can affect the value of the
collateral, particularly because at the time of enforcement, these
may not be at the then-applicable market rates.
Lenders should pay close attention to
any vague obligations which cannot be quantified and which a tenant
may use as leverage.
The Ontario Court of Appeal confirmed that courts will generally support and uphold decisions of condominium directors because they are better positioned than judges to make decisions pertaining to their buildings.
According to the city bylaws in Calgary, the grading of lots for new buildings must be done properly so that the water never flows toward the new building or any other nearby properties, but away from those buildings.
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